Environment Analysis
I actually coin this term. Don't really know that if it is really considered as a field of study as compared to Technical Analysis and Fundamental Analysis, the two schools of investing that most people fall into. Of course most people will claim that they are both, I don't know why. Somehow, there is a social stigma among the young adults on sticking to just one school. For me, I proud to say that I follow environment analysis.
What is environment analysis?
Actually it's a lot on macro aspects of the market.
The no.1 rule is of course to determine whether it is a positive environment or a negative environment. As simple as it sounds, it requires some thinking, only some =).
To do this, you need to understand some characteristic of the market.
1. In a positive market, the indices will usually go up steadily.
2. There will be no crazy huge gain day usually.
3. Bad news are ignored.
4. Corrections are triggered by weird news that don't make sense. For eg, "Fed Is Not Cutting Rates This Time". To some extent, you can actually "feel" that the market is bound to correct and it is just using something as an excuse.
5. The opposite applies for a negative market.
6. Oh man, this is very simple, can I make some money now? =D
Picture paints a thousand words
Well, to see things in a clearer manner, you need to look at some charts. Wait a min, isn't charts technical analysis?
Honestly speaking, technical analysis is a lot more on indicators that are designed by "smart" people. But there are tons of indicators out there which all claim to work just as well. Hmm... ...Nonetheless, charts tell you a lot, and I don't consider it technical analysis. This is the DJI chart for your info. To understand the environment, you need to realise how crazy the market has been going. One look at the chart, you can see two distinct gradient lines.
Conclusion: Link back to point no.1, you actually see a take off in the market which is good for all bulls out there but a possible indication of the final stage of a bull market. I mean, it is logical to think it the same way as "last burst of fire". Along the take off stage, bad news were ignored. Well, sub prime fiasco was introduced during July 2007 but after 1 month, the market continued its rampant bullish mode.
Why Environment Analysis?
I have emphasized this many times and I think I should emphasize it again. In a bull market, all stocks go up (at least most of the blue chips or sound companies), in a bear market, all stocks fall. There is only one side to the market and that is the right side. It is not the long or short side. Bear this in mind, and tell this to people around you as well.
Maybe, you need some great fundamental analysis skills to pick out really amazing performers but if you could understand the Shanghai market environment, you are looking at an index that shot up 300% in two years. Do you really need to study a lot of fundamentals of companies? Good companies like Goldman Sachs, RIMM can't tank the market selling pressure as well. But they have real solid fundamentals. I'm not trying to deny fundamental analysis strengths and if you disagree with me, read the previous paragraph again. =)
Honestly speaking, technical analysis is... you know...
Alright, if the indicators really work so well, everyone will be rich. =)
Is that all?
Actually, you need to have some economics knowledge. Don't really need very in-depth one. To some extent, it's also common sense. Take sub-prime for example.
1. You need to know that consumption is the main driver of the US economy.
2. You need to know that housing drives consumption in US economy. Don't really have to know why, it is common knowledge. Just accept the fact.
3. You need to know that sub-prime deals with credit and credit is an intangible stuff. It means that you can't build credit overnight. It is like trust, you can't place your trust again on someone who has broken it. It takes time for you to trust and believe in him again isn't it. Sometimes, it takes forever.
4. So, after know the above 3, you can come to the conclusion with the death of consumerism in mind and the downturn in US economy. Of course there are more underlying issues and more economics at work but let's just take things simple.
5. Lastly, you need to realise that it takes time for reality to catch up with the illusion especially when they have diverged from one another for quite some time. Even though you know the economy is going to be very bad, be patient, it takes time for things to unfold. I have made this mistake before, I hope you don't follow my footpath.
So...
To sum things up, if you sort of apply to current situation, we are still in a crazy bear market isn't it. No matter what price level is oil heading to, it is largely viewed as an negative news. We haven't really reached some panic selling stage. It makes sense for a bear market to end with some bankruptcies. I feel that the bottom is coming (dow 9750, sti 2400), I think some real panic selling and bankruptcies will follow soon. Lehman and The two F words? lol possibly?
I hope to fine tune this theory more. This is the prototype, but the general idea is still there.
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